John Armitage: How He Invests, Building Egerton, and What Worries Him About AI

Intel

Across the shows: 1 speaker in other episodes, 0 bullish and 1 bearish calls, past 30 days

• John Armitage · Egerton CapitalBearish

  Intel lost its way for years because management did not dare to innovate or enter new fields

  Armitage cites Intel as an example of how culture and capital allocation can destroy a company. Intel lost its way for a long period because management did not dare to innovate or enter new fields, and business with incredible market shares was eroded as a result.

  “look at the way Intel lost its way for such a long period. And that was because they didn't dare to innovate, they didn't dare to enter new fields.”at 2:38

The Coca-Cola Company

• John Armitage · Egerton CapitalBearish

  Coca-Cola is a great company but has likely underperformed the market for 25 years due to no new product

  Armitage concedes Coca-Cola is a great company with no substitute for Coke, but argues it has probably underperformed the market over the last 25 years because it has not come up with a new product to drive growth. The point is that great companies change over time and need to keep innovating.

  “Look, Coca Cola is a great company. And there isn't a substitute for Coke. But the fact is it's probably underperformed the market in the last twenty five years.”at 4:39

NVIDIA

Across the shows: 10 speakers in other episodes, 10 bullish and 3 bearish calls, past 30 days

• John Armitage · Egerton CapitalUncertain

  Memory cost inflation is a big issue for Nvidia's bill of materials against its 75% gross margins

  Armitage calls memory cost inflation one of the big issues for Nvidia because its bill of materials feeds into a 75% gross margin. Nvidia has just guided to gross margins in the near term, but he says the key work is to estimate how the bill of materials and memory price contracts flow through, then stress test how a further memory price spike would affect margins.

  “one of the big issues about NVIDIA is memory cost inflation and what it does to their bill of materials. Because NVIDIA makes 75% gross margins.”at 13:41

Visa

• John Armitage · Egerton CapitalBullish

  Visa is a high-quality business with 67% margins and predictable drivers; he owns it and it has risen since 2008-era lows

  Armitage says his fund owns Visa, which makes 67% margins, so its top line drivers are roughly known and its costs are clear, unlike opaque businesses such as Airbus or reinsurers. He adds that at one point Visa was hard to give away, yet it is up about 20% since, showing the value of holding a quality business through sentiment swings.

  “There is a lot in companies which is very private, but then there are some companies, like we happen to own Visa, where they make 67% margins, you kind of know roughly what drives the top line”at 14:21

Ryanair Holdings

• John Armitage · Egerton CapitalBullish

  Ryanair runs the world's most profitable airline; CEO Michael O'Leary is an outstanding, self-aware executive

  Armitage judges management partly on whether executives admit mistakes, and calls Ryanair's CEO Michael O'Leary one of the most outstanding executives in the world. He cites O'Leary's relentless focus on detail, strong team, and awareness of what he does right and wrong, which helped build the world's most profitable airline.

  “one of the most outstanding executives in the world is Michael O'Leary.”at 18:28

Altice USA

• John Armitage · Egerton CapitalBearish

  Altice's low-growth, leverage-driven model left no room for error, so he sold it on a slight miss

  Altice was run by a compelling CEO who was brilliant at cutting costs and used a lot of leverage and acquisitions, with little top-line growth. Armitage is suspicious of companies without much top-line growth because there is little room for a mistake. A slight quarterly miss that did not change his medium-term numbers still led him to sell, because the business model had no cushion.

  “I'm always quite suspicious when companies don't have much top line growth, because I think if they don't have much top line growth, what's the room for a mistake?”at 20:38

GE Aerospace

• John Armitage · Egerton CapitalBearish

  GE at 35 times earnings is a bit rich, so he disagrees with the view that it is cheap

  Armitage respects an investor who calls GE cheap, but says that at 35 times earnings it is a bit rich to him. He would rather buy a good company with decent double-digit growth near 30 times next year's earnings, which he sees as attractive in today's environment.

  “To me, it's a bit rich, 35 times earnings.”at 24:12

US stock market outlook

• John Armitage · Egerton Capital

  US markets look high, but AI-driven growth and strong US earnings are propping them up

  Armitage says markets are high, US bond yields have risen, there are two wars and the oil price is up, which makes the market look odd. He reads it as AI-driven growth and strong US earnings holding the markets up, and says without that stimulus the world would be in a different place.

  “How I read it is that if we didn't have the stimulus of AI driven growth, and if we didn't have strong earnings in The US, the world would be in a different place.”at 9:20

• John Armitage · Egerton Capital

  Egerton dislikes AI's market concentration but must hold it, since AI drives much of the US economy.

  Armitage says he doesn't like the concentration of the market in AI, but it is very powerful. Egerton owns NVIDIA, Amphenol, ASML and two hyperscalers. His argument is that so many things in the US economy are keyed off AI that any diversified portfolio will end up with more AI exposure than its managers expect, so avoiding it is not a practical option.

  “And so many things in The US economy are keyed off AI that inevitably we and every other portfolio will have more of it than they think.”at 45:14

AI: overall outlook

• John Armitage · Egerton Capital

  AI will make markets more efficient and speed them up, so generating alpha is much harder

  Armitage says markets are infinitely more efficient than when he was young, and AI will speed things up further, making alpha much harder to earn. He worries that if many people ask AI the same questions they may get the same answers, creating a herd effect and a single source of truth. Concentration and thematic bets are how he thinks alpha can still be generated, but he says very few people can do that well.

  “Think markets are infinitely more efficient than they were when I was young. And clearly AI will, and AI will speed things up.”at 31:30

Earnings & corporate profits

• John Armitage · Egerton Capital

  Corporate earnings have already been pushed as far as they can go, so Armitage is more cautious.

  Armitage contrasts the environment when he started investing, when inflation and interest rates were falling and free markets seemed to be winning, with today. He says economies have maxed out and corporates have done a lot to raise their earnings already, and that the West is under threat with two wars. He says this makes him more cautious.

  “Economies have maxed out, corporates have sort of done a lot to raise their earnings, we have two wars, and the West is under threat. And so maybe I am more cautious as a result of it.”at 43:39

US rates & the Fed

• John Armitage · Egerton Capital

  Low rates for long periods lifted all stocks and made shorting hard; rising rates have eased that.

  Armitage explains why shorting has been hard. Many stocks rise over time, and for a long period of low interest rates everything floated up. In those euphoric periods people believe all kinds of things and any company can raise capital. He says shorting has been less difficult recently since interest rates went up.

  “for a very long period when interest rates were low, everything floated up. And in periods of euphoria, people believe all kinds of things.”at 46:23